Why are banks still reluctant to lend to small businesses?

May 30, 2017

Recent research indicates that 35% of small and medium-sized businesses in the UK still find accessing finance from banks a challenge. 9% went even further, saying that it was very difficult or almost impossible. This reluctance has led to 60% of SMEs being concerned about their ability to finance long-term growth.

This situation is endorsed by the British Business Bank plc, which estimates that approximately 100,000 SME loan applications are declined by banks each year - amounting to a potential funding gap of £4 billion. Bank of England statistics also reveal that lending to Britain’s private sector businesses by the largest UK banks fell by £536 million from December to January.

Not surprisingly the research indicated that the availability of finance is the most important factor in helping small businesses grow and prosper. If a small business loan application is rejected by a bank it raises serious concerns for that business about its future, if it is unable to finance necessary expenses.

Some of the main reasons cited by SMEs in the research for seeking further financing are:

Hiring new staff (24%)

Investing in new infrastructure or capital equipment (20%)

Buying or refurbishing premises (20%)

Working capital (18%)

Research & Development (9%)

All perfectly legitimate reasons. So why are banks still apparently reluctant to lend to small businesses?

Research from the chartered accountants and business advisers Kingston Smith indicates that there is something of a communication gap between lenders and SMEs. According to Paul Samrah, a partner at the firm:

“Many entrepreneurs appeared unaware of banks’ lending criteria, and the need to have a good credit rating and a realistic business plan. Meanwhile, the feedback and support that banks offer entrepreneurs following their loan decision is often unclear and inadequate. Bankers often don’t have the knowledge or experience to actually help businesses. Clearly, this mutual lack of understanding can result in significant barriers to SME lending.”

Thankfully, help is at hand! The Government is actively encouraging the growth of small and medium-sized businesses. According to Margot James, small businesses minister:

“‘Supporting business to grow is one of the ten pillars of the government’s Industrial Strategy Green Paper and we are committed to creating the right conditions for SMEs to thrive as part of our plan to build an economy that works for all.”

Last October a scheme was introduced under the provisions of the The Small Business, Enterprise & Employment Act 2015. This obliges nine High Street banks to redirect all rejected applications for small business loans to independent finance organizations. This gives SMEs a second chance to obtain small business loans by alternative means. You can read more about the scheme in an earlier blog Banks now obliged to phone a friend! At Fair Business Loans we are passionate about supporting business growth and are part of this scheme.

The research also identified a perceived inequality between funding available to businesses located in and outside London. 41% of small businesses who are located outside London and the South East believe they do not have access to finance on an equal basis to businesses that are based in London.

Last year, Fair Business Loans extended our financial services to be nationwide rather than just London. We are now able to lend to businesses across the UK, through our online application system and dedicated team of experienced Relationship Managers. Relationship is at the heart of everything we do: with every customer we focus on getting to know you, understanding your business, and developing a mutually trusting relationship. Unlike the bankers quoted above, we do have the knowledge and experience to actually help businesses, and we aim is to be supporters of businesses rather than pure financiers.

So if you are seeking a small business loan and have either been rejected by a bank or are wary of approaching one in the first place then why not get in touch with us to discuss how Fair Business Loans could help you to obtain the finance you need to secure the future of your business?